Amazon's hypocritical tax scheme: How exploiting a massive loophole helped it destroy bookstores

A free market success story? Hardly. Amazon's built on a billion-dollar loophole, and they're still manipulating it

Published April 25, 2014 2:15PM (EDT)


Thanks to a new study by the National Bureau for Economic Research, we now have data that reinforces something many people probably understood intuitively: A large chunk of Amazon’s success came, not as the result of private-sector brilliance, but because of a simple tax loophole.

For most of its 20-year history, enjoyed a substantial advantage over real-world retailers. Unlike these competitors, Amazon did not have to charge its customers for state sales tax. That deprived states of much-needed revenue, while also giving Amazon a competitive advantage at government expense.

That’s not exactly a “free market” success story, is it?

The NBER study used data from five states that began collecting taxes from Amazon – California, New Jersey, Pennsylvania, Texas and Virginia – and found that Amazon’s sales fell by nearly 10 percent when the sales-tax advantage was removed.

Does that mean that Amazon would have been 10 percent less successful had it not enjoyed this advantage, and that Amazon CEO Jeff Bezos’ estimated $22 billion fortune would therefore have been a mere $20 billion?

Hardly. The difference would almost certainly have been much greater than that.

While it’s impossible to know retrospectively precisely how Amazon might have evolved without this “sales-tax subsidy,” it’s reasonable to assume that the company’s growth curve would have been much smaller. Many of the company’s early customers were attracted, not by the novelty of the Internet or the attractiveness of its website, but by the chance to buy goods without paying sales tax.

People don’t remember it much now, but online purchasing services like Amazon’s met with considerable consumer resistance when they were first introduced. Users found the websites complicated and difficult to navigate. Buyers had a hard time adjusting to the deferral of gratification they experienced when products arrived days after they had been purchased.

In fact, Amazon – which has dramatically curtailed the bookstore industry and is poised to have a similar impact in other retail areas – might not have had nearly as great an economic footprint without this subsidy. Now the subsidy is gradually being removed, with 19 states now receiving sales tax on Amazon transactions.

That should help the retail employment picture in those states, according to polling that said that more than one consumer in four would do more shopping with local retailers if the tax were applied online. The NEBR study seems to bear this out, concluding that “the decline in Amazon purchases is offset by a 2 percent increase in purchases at local brick-and-mortar retailers …”

But the book-selling industry will never be what it was, and the broader transformation wrought in part by this government subsidy will probably never be undone. The lesson for free marketeers is this: Your entrepreneurial success stories don’t necessarily mean what you think they mean.

In Amazon’s case, tax breaks were a key part of the formula. Add in its use of the Internet, which is a government creation, and Amazon becomes a story about American public policy at least as much as it is about American ingenuity.

The Amazon story illustrates an observation that has become a truism in the inequality discussion: inequality and other economic dislocations aren’t the product of invisible forces, free-market or otherwise. They are the result of policy actions.

Nobody understands that better than Amazon itself. It exploited the sales-tax advantage as long as it could. Then Amazon’s practices were changed by something called the “permanent establishment” principle, which requires corporations to collect sales tax in states where they have fixed, permanent facilities. As Amazon drew, it was forced to build more such facilities around the country. That, along with state-level negotiations, have curtailed its “subsidy” to the point where it now collects sales taxes for more than half the residents of the United States.

That probably explains this sentence, from a Wall Street Journal article: “Even as Amazon fights sales taxes in some states, it is supporting a bill that would apply an online sales tax nationwide. Amazon thinks such a law would level the playing field with e-commerce rivals who don’t have affiliates. The bill is pending in Congress.”

The idea is almost certainly a good one, both for revenue-starved states and for local businesses. The NEBR study found that otherwise most of the benefits of changing Amazon’s practices went to other online retailers, who saw a 19.8 percent surge in sales – nearly 10 times that of local retailers.

Not that that makes Amazon any less hypocritical. It’s fighting to prevent its online competitors from having the same sales-tax edge it enjoyed for so many years. Having built its success on this unfair advantage, Amazon doesn’t want any other online retailers to have the same kind of advantage over it.

Does that still sound like a free-market success story do you?

By Richard (RJ) Eskow

Richard (RJ) Eskow is a writer and policy analyst. He is a Senior Fellow with the Campaign for America's Future and is host and managing editor of The Zero Hour on We Act Radio.

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